According to Goldman Sachs, the Federal Reserve will likely hike interest rates four times for 2002. In addition, the central bank will likely start its balance sheet runoff in July at the latest.
Goldman Sachs Says Federal Reserve Will Hike Interest Rates Four Times
Goldman Sachs chief economist Jan Hatzius said in a research note that the firm expects the Fed to hike interest rates four times.
The minutes from the December Federal Open Market Committee meeting suggest a stronger, more hawkish approach by the Fed.
“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius said.
“With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December,” he added.
In its meeting minutes, Fed officials signaled they will move quickly compared to the last time they tightened monetary policy.
As a result of these policies, the Fed managed to keep the US economy from overheating amid high inflation and full employment.
However, these policies are now becoming unnecessary. In addition, the Fed’s large balance sheet is suppressing longer-term borrowing costs. This “could warrant a potentially faster pace of policy rate normalization,” the minutes reported.
Reducing The Fed’s Balance Sheet
The agency’s $8.8 trillion balance sheet reduction is likely “closer to that of policy-rate liftoff,” the minutes also said. At the same time, the US unemployment rate fell below 4%.
In addition, wages also went higher on average last month. These all add up to a tightening labor market.
Goldman’s forecast for the terminal fund's rate remains unchanged at 2.5%-2.75%. “Even with four hikes, our path for the fund's rate is only modestly above-market pricing for 2022, but the gap grows significantly in subsequent years,” Hatzius wrote.
Fed Earlier Indicated 3 Interest Rate Hikes
Prior to Goldman Sachs’ prediction of four rate increases, the Fed indicated it will hike interest rates three times in 2022. Last December, the agency said it would end its pandemic-era bond purchases in March.
It will also prepare for three quarter-percentage-point interest rate hikes by the end of 2022. Right now, the agency forecasts inflation rates to run at 2.6% next year.
This is about 0.4% higher than their September forecasts. However, interest rates will fall to 2.3% in 2022 and 2.1% in 2024.
“The economy no longer needs increasing amounts of policy support,” Chairman Jerome Powell said. He contrasted the near-depression conditions during the early stages of the pandemic with today’s inflation and a nearly-full labor market.
The Fed said it will need to hike interest from near-zero levels to 0.90% by the end of 2022. This will then lead to further hikes that will end up with interest rates at 1.6% in 2023 and ultimately, 2.1% by 2024.
Watch the ABC News video reporting that the Fed considers 3 interest rate hikes in 2022:
Do you agree with Goldman Sachs’ that the US Federal Reserve will need to hike interest rates four times in 2022? Will this help counteract the effects of high inflation sooner or later?
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